Munger_Disciple

My guess is 5-7% range (and may beat the market). Intrinsic value may grow at 10% on the high side, and P/B (even though it is less relevant now, but it's a quick & dirty valuation tool, and not a bad one) let's say shrinks from 1.75 to 1.5 over the next 5 years, so that shaves away 3% per annum from returns, so you will get 7%. If IV only grows at 9%, then you will get a lower 6% annual return. All these numbers are over the next 5 years. Charlie (Munger) said secret to happiness in life is having low expectations; so it is better to lower our expectations after the tremendous run-up in 2024. I think a lot would depend on the interest rate environment in the next 5-10 years and sadly that's almost impossible to predict.

That's interesting. At least avoids capital gains taxes.

I agree that writing covered calls makes more sense in a tax deferred account. In a taxable account, it's better not to be too cute. Just a simple buy and hold coupled with small sales to satisfy cash needs is the better approach.

The Berkshire shareholders who are selling covered calls against stock really want to have their cake and eat it too. IMO it doesn't make much sense. They should simply sell a tiny bit of their holding if they need the cash or want to reallocate it elsewhere.

Seems like a lot of agony for little upside. If you think BRK is trading somewhat above its intrinsic value, why not just lighten up a bit instead of all these mental gymnastics?

You misunderstand the point I was trying to make. If you are already a US citizen, it doesn't make much sense to renounce your citizenship unless you have very little net worth because there is an exit tax which is levied on all the assets you own (so it is more like a wealth tax on all you wealth including unrealized capital gains) when you renounce your US citizenship. So you are better off biting the bullet, keep your US citizenship and pay taxes on worldwide income even if you work and live abroad.

That's an excellent idea!

I trust Buffett to manage Berkshire in the best interest of shareholders as he had done for 60 years now. I am also 100% certain that Buffett thought through how Greg would potentially manage Berkshire after he takes over. If you don't believe that, you should sell your stock & move on instead of back seat driving.

Yes, I would rather Greg have T-Bills than Apple stock at 33X.

There is zero chance of that happening while Buffett is in charge. Afterwards, I hope the board considers a small variable annual dividend as opposed to a large special one as the last resort if stock buybacks are not value additive after all the internal capital needs and potential acquisitions are funded.

Just be aware that Berkshire fully participated in the market downdraft in 2008-09, so it's not quite an insurance policy against corrections (pun intended ).

Berkshire had a similar melt up during 2007 before the proverbial GFC s**t hit the fan. Rightly or wrongly, Berkshire is seen as a safe haven during potential troubles. Perhaps markets are telling us that we are reaching the top of the MAG 7 froth? If there is a major market correction, I can't imagine Berkshire not being part of it though.

Agree that it's an interesting topic .

First of all, the risk is 2% that the big one can happen in any single year, and it is obviously much higher when you expand your investment horizon. If you have a really long horizon, the probability of getting hit with at least one big one is close to 100%. So you can't just ignore it. It doesn't necessarily make Fairfax un-investable but it does affect my position sizing. Randomness (or luck as you say) is inherent in any probabilistic game including investing especially in the short run. In the long run, the stock performance should converge to the business performance.

I don't disagree that Fairfax is cheap, especially relative to others (ignoring for a moment tail risks). However I am a long term investor and I think about tail risks when I invest. I own only Berkshire & Fairfax and no other insurers (so can't comment on those). I am very confident Berkshire can very easily handle a $600B industry event. In fact Berkshire will report net profit in a year such an event happens. I think Fairfax will survive but take a hit to earnings (for two years I think at current run rate), so I am ok with it. Most other P/C insurers will go bankrupt in such a scenario.

I already provided an estimate in the earlier post based on the next three years earning visibility but after that I don't know.

Yeah aggregation makes sense. Most important is the ability of Fairfax to survive a super CAT event like a $600B loss event, which allows them to prosper in the hard market to follow the event. Let us say in the worst case, Fairfax suffers 1.25% of 600B = 7.5B loss event pre-tax. They can survive that reasonably well but it would wipe out a couple of years worth of earnings.

Buffett said in 2017 that the probability of a $400B (USD) industry loss event in any given year (in his estimate) is 2%. Adjusting for inflation and increase in the cost of construction, that would be a $600B event today. I assume that that events that have lower loss may occur at greater probability than 2%. At Berkshire, they underwrite for a long term CR of 100% including CAT and super CAT years. I have no idea what CR is achievable for Fairfax over the next 3 years (which depends on whether there is a CAT/super CAT event in the next three years or not and its magnitude) but I would think that a 10-15 year average CR of 100 taking into account a couple of really bad CAT years is prudent.

Doesn't one need to take into account the possibility of super CAT events and their effect on the "normalized ROE" and P/B?

Charlie changed my life. I had the good fortune to meet him in an intimate setting a couple of times & I will cherish those moments all my life. I miss Charlie dearly but the good thing is that he left a lot behind for us. There is so much wisdom in his teachings that reading and re-reading every year is a terrific habit. You are on the right path.

And 44% tax on realized and unrealized capital gains, not sure if it is even constitutional.

For me, the top 3 are: 1. Buffett's shareholder letters 2. Anything Charlie (Munger) wrote or said. Of course Poor Charlie's Almanack is a good starting point. 3. Business biographies While not in the top 3, I thoroughly enjoyed Luca Dellanna's Ergodicity very much: https://www.amazon.com/Ergodicity-Definition-Examples-Implications-Possible/dp/B09PHBV2HD A good addition to Annie Duke's Thinking in Bets, another excellent work.

Annualizing the first six month net premiums for 2024, we get $26 Billion in net annual premiums. So that gives us roughly $3.6 Billion loss for a Katrina type CAT event which is roughly in line with the numbers suggested by @SafetyinNumbers. It equates to roughly 12%-13% after tax earnings hit to book.

Thanks @SafetyinNumbers, @StubbleJumper and @Cigarbutt for your perspectives on the loss estimates.